0R13

UNIT V DEPRECIATION 9
Depreciation- Introduction, Straight line method of depreciation, declining balance method
of depreciation-Sum of the years digits method of depreciation, sinking fund method of
depreciation/ Annuity method of depreciation, service output method of depreciation-
Evaluation of public alternatives- introduction, Examples, Inflation adjusted decisions
procedure to adjust inflation, Examples on comparison of alternatives and determination of
economic life of asset.
R8
UNIT V DEPRECIATION 9
Depreciation- Introduction, Straight line method of depreciation, declining balance method
of depreciation-Sum of the years digits method of depreciation, sinking fund method of
depreciation/ Annuity method of depreciation, service output method of depreciation-
Evaluation of public alternatives- introduction, Examples, Inflation adjusted decisions
procedure to adjust inflation, Examples on comparison of alternatives and determination of
economic life of asset.

Fixed assets - assets which are purchased for long-term use in business and are not
primarily for immediate resale for conversion into cash, but those assets can be
used to earn money indirectly in the business and resold after its useful life, such
as
Land
Buildings
equipment
1. Depreciation
a. Introduction, 5.1 (t5.1.1), 5.2. (t5.1.3), 5.3 (t5.1.4) Causes of depreciation
(just below)
i. Wear and tear. Any asset will gradually break down over a certain usage period, as
parts wear out and need to be replaced. Eventually, the asset can no longer be repaired,
and must be disposed of. This cause is most common for production equipment,
which typically has a manufacturer's recommended life span that is based on a certain
number of units produced. Other assets, such as buildings, can be repaired and
upgraded for long periods of time.
 ii. Perishability. Some assets have an extremely short life span. This condition is most
applicable to inventory, rather than fixed assets. E.g. Bio - chemicals

iii. Usage rights. A fixed asset may actually be a right to use something (such as
software or a database) for a certain period of time. If so, its life span terminates
when the usage rights expire, so depreciation must be completed by the end of the
usage period.

iv. Natural resource usage. If an asset is natural resources, such as an oil reservoir, the
depletion of the resource causes depreciation (in this case, it is called depletion,
rather than depreciation). The pace of depletion may change if a company
subsequently alters its estimate of reserves remaining.

v. Inefficiency/obsolescence. Some equipment will be rendered obsolete by more

efficient equipment, which reduces the usability of the original equipment.

b. Straight line method of depreciation, 5.3

For book value refer: table in 5.5.

Rate of depreciation is not clearly used in example 5.1. Below step to be clarified

c. declining balance method of depreciation- 5.6

d. Sum of the years digits method of depreciation, 5.9
e. sinking fund method of depreciation 5.13
f. Annuity method of depreciation,
 g. service output method of depreciation- 5.19
2. Evaluation of public alternatives-
a. introduction,
b. Examples,
c. Inflation adjusted decisions
d. procedure to adjust inflation,
e. Examples on comparison of alternatives and determination of economic life
of asset.